On remand following the Supreme Court’s reversal 11 months ago in Truck Ins. Exch. v. Kaiser Gypsum Co., 602 U.S. 268 (Sup. Ct. June 6, 2024), the Fourth Circuit upheld confirmation of the debtor’s chapter 11 plan dealing with asbestos claims.

The Supreme Court reversed last year, ruling that the insurer had standing to object to confirmation of the plan even though the plan was “insurance neutral.”

On different issues arising on remand, the April 29 opinion by Circuit Judge G. Steven Agee holds that the plan was filed in good faith because it gave the insurer only the rights the insurer had under the existing insurance policy. Good faith does not require giving the insurer more rights than those already contained in the existing policy, even when other parties under the plan have more rights of defense than the insurer.

Among other things, the appeals court said that sending insured claims through the tort system rather than through the trust created by the plan was “not evidence of bad faith.”

The Asbestos Plan

Facing 14,000 pending lawsuits, the corporate debtor proposed a chapter 11 plan under Section 524(g) to create a trust wiping away present and future asbestos claims. All asbestos claims were channeled to a trust.

The principal asset for the trust was the debtor’s primary insurance policy, with a coverage limit of $500,000 per claim. The insurer was obliged by the policy to defend and indemnify the debtor, even if the claims were false or fraudulent. Defense costs were not counted against the policy limit for each claim, meaning that the policy was non-eroding. The policy had no maximum aggregate limit.

Asbestos claims under the plan were divided into two classes: (1) insured claims covered by the policy; and (2) uninsured claims not covered by the policy. Uninsured claims, of which there were few, were to be paid entirely by the trust.

Claims covered by insurance were to be litigated nominally against the debtor in the tort system, but subject to the coverage limit for each claim. The trust would pay a $5,000 deductible for each insured claim.

The claims covered by insurance remained subject to the insurer’s prepetition coverage defenses. Thus, the insurer was liable for any claim that fell under the unmodified terms of the policy.

The trust was funded by the insurance policy, $49 million from the debtor’s parent and a $1 million note issued by the debtor.

The uninsured claims were subject to anti-fraud provisions under the plan to protect the trust by requiring the claimants to provide disclosures designed to avoid fraud and duplicate claims. The plan had no anti-fraud provisions for insured claims.

Unsecured creditors were to be paid in full.

Asbestos claimants, the only class impaired by the plan, voted unanimously in favor of the plan. The only confirmation objection came from an insurer. The insurer was not entitled to vote because its unsecured claim would be paid in full. The insurer retained all its rights under the insurance policy.

Confirmation and Appeals

The insurer objected to confirmation, contending that the plan was not proposed in good faith and was not insurance neutral for lack of anti-fraud provisions covering insured claims. The bankruptcy court wrote an opinion recommending that the district court approve the plan, finding that it was insurance neutral and filed in good faith. The bankruptcy court also decided that the plan met all requirements for an asbestos plan under Section 524(g).

Because the plan was insurance neutral, the bankruptcy court concluded that the insurer was not a party in interest under Section 1109(b) and thus lacked standing to lodge an objection to the plan.

The district court confirmed the plan, adopting the bankruptcy court’s findings in toto after de novo review. In re Kaiser Gypsum Co., 16-31602, 2021 WL 3215102 (W.D.N.C. July 28, 2021).

On appeal, the Fourth Circuit affirmed. Truck Insurance Exchange v. Kaiser Gypsum Co. (In re Kaiser Gypsum Co.), 60 F.4th 73 (4th Cir. Feb. 14, 2023), cert. granted sub nom. Truck Ins. Exch. v. Kaiser Gypsum Co., No. 22-1079, 2023 WL 6780372 (Oct. 13, 2023). To read ABI’s report on the Fourth Circuit affirmance, click here.

Finding the plan “insurance neutral,” the Fourth Circuit believed that the insurance company had no standing in the bankruptcy court or on appeal to object to the merits of the plan pertaining to any aspects of the plan other than insurance neutrality. In a footnote, the appeals court said that the insurer had Article III, or constitutional, standing to challenge the finding of insurance neutrality.

The insurer filed a petition for certiorari, based on a split of circuits. The Court granted certiorari and heard argument in March 2024. The Supreme Court reversed on June 6, 2024.

For a unanimous Court, Justice Sonia Sotomayor explained why the insurer had standing even though the plan was insurance neutral:

The fact that [the insurer’s] financial exposure may be directly and adversely affected by a plan is sufficient to give [the insurer] . . . a right to voice its objections in reorganization proceedings.

Truck Ins. Exch., supra, 602 U.S. at 284. To read ABI’s report on Truck Insurance, click here.

Dealing only with standing, the opinion was narrow and did not reach the merits regarding the insurer’s plan objections. The Court reversed and remanded for further proceedings.

Good Faith

Reaching the merits for the first time on remand, Judge Agee said that the Fourth Circuit was confronted with two questions: (1) Was the plan proposed in good faith as required by Section 1129(a)(3), and (2) did the plan satisfy the four requirements for an asbestos plan under Section 524(g)?

On good faith, Judge Agee said that the Fourth Circuit has never declared what it means in the confirmation context. However, he said that the court “must consider the totality of the circumstances.” The plan, he said, was found by the district court to be the product of arm’s-length negotiations and comported “with the objectives of the Bankruptcy Code.”

Judge Agee said that the “unchallenged” findings by the district court “satisfie[d] § 1129(a)(3)’s good faith requirement.”

In derogation of the good faith findings, Judge Agee said that the insurer “bristles at the fact that insured asbestos claims — but not uninsured asbestos claims — are to be litigated in the tort system under the Plan.” However, he said that “bankruptcy courts routinely allow claimants to pursue insured claims through the tort system, a fact that [the insurer] does not contest.” Referring to the case at hand, he said that “the Debtors’ refusal to add anti-fraud measures for the insured claims in the tort system, without more, does not signify bad faith.”

“Simply put,” Judge Agee said,

the Debtors are merely utilizing the contractual insurance rights to which they are entitled. [The insurer’s] dissatisfaction with this state of affairs does not give it a cognizable basis to rewrite the policy it freely entered under the guise of the Debtors’ purported “bad faith.”

In response to the insurer’s contention that the tort system does not deal adequately with fraudulent claims, Judge Agee said, “The adversarial and discovery processes in state and federal courts are more than enough to protect [the insurer] from the fraudulent claims that it fears will occur.” He added, “Unless and until [the insurer] provides concrete evidence to support its position, its concerns will remain purely speculative and thus cannot support its bad faith argument.”

Stopping short of laying down a rule for all cases, Judge Agee said that “the necessity of [anti-fraud provisions] will inevitably vary on the facts of any given case.” On the other hand, he said “there is nothing in the Bankruptcy Code that legally requires” anti-fraud provisions.

Judge Agee affirmed the district court’s finding of good faith.

Section 524(g)

The final section of Judge Agee’s opinion dealt with the issue of whether or not the plan satisfied the additional confirmation requirements for asbestos plans contained in Section 524(g).

Judge Agee conducted a detailed analysis of the plan and concluded that the plan complied with Section 524(g). Anyone confronting an asbestos plan should read the opinion in full text to understand how the debtor structured the plan to comply with Section 524(g).

Judge Agee’s decision is a blueprint for drafting a mass tort plan in compliance with Section 524(g). He affirmed the judgment of the district court confirming the plan.

The Concurrence

Circuit Judge Arthur M. Quattlebaum, Jr., “joined the majority opinion” but wrote “separately to point out that [the insurer] has company in failing to point to evidence to support its position about good faith.”

Judge Quattlebaum agreed that the district court’s findings on good faith were not clear error. He said that the debtor had not given “much of a response” at oral argument to explain why the debtor “would not require or provide anti-fraud-related disclosures and authorizations to [the insurer].”

Judge Quattlebaum said that the information sought in the anti-fraud provisions was “so basic that any asbestos plaintiff would be required to provide it in discovery. So, I do not understand why [the debtor] would not agree to require claimants, at the outset, to provide the information [that the insurer] seeks.”

Because the insurer “did not point to specific evidence of actual claimants committing fraud in this case,” Judge Quattlebaum “concur[red] in the majority’s decision.”